Danger of political instability because of lack of clear successor to President Nazarbayev

Landlocked and low population density, particularly in the northern regions

Risk assessment

Moderate growth and fragile banking system

The economy will keep growing at a moderate pace in 2019. Investment (21% of GDP) will continue to benefit from the development of infrastructure (including roads, railways, and gas) as part of the Nurly Zhol 2015/19 programme, and also potentially under the Belt and Road initiative, which will support the construction sector. Development of the Tengiz oil field continues with a view to providing a future growth driver for oil production, which is evening out as the Kashagan field reaches maturity. Household consumption (51% of GDP) is expected to accelerate, driven by real wage growth, which will benefit from the oil windfall and new social benefits. Through the Five Social Initiatives adopted in March 2018, the government aims to make housing affordable, cut taxes on low incomes from 10% to 1% as of January 1, 2019, lower the cost of education, and promote micro-credit. A new public retirement system increased pensions by between 15% and 20% in July 2018. Services (60% of GDP), especially trade, will significantly benefit from strong domestic demand. Exports, including oil (57% of the total) and metals (16%) – notably steel, iron, copper, and uranium –, are not expected to repeat their excellent performance in 2018, which was largely due to upgrades to three refineries, the completion of a nickel plant, and the increase in oil sales, both in volume and value. As imports will be driven by domestic demand at the same time, the contribution of trade to growth should be slightly negative. Since the US dollar peg was scrapped and the tenge was allowed to float (August 2015), the central bank has focused on controlling inflation. However, inflation remains high due to the impact of tenge depreciation on the prices of imported products, the slow process of modernising the agri-food sector, and the impact of the VAT hike in Russia, which accounts for 40% of imports. Moreover, while monetary policy has gained further credibility, its effectiveness is undermined by the situation of credit, which occupies a small place (25% of GDP) and is frequently subsidised. Furthermore, despite licence withdrawals, mergers, costly recapitalisations, and bad debt takeovers by the state and the central bank, the banking system remains fragile. The percentage of impaired loans is certainly higher than the official rate of 8.8% (July 2018). In addition, the system is both fragmented (about 30 institutions, many small) and concentrated, with one institution accounting for more than a third of the deposits. Many institutions are owned by influential people who are not easily pushed into line and who manage to obtain public funds to avoid liquidation. The system also suffers from a small market dominated by consumer credit, with other sectors either self-financing or turning to foreign markets.

Low deficits and a well-endowed sovereign wealth fund thanks to oil

With the rise in oil prices and production, the end of aid to the banking sector, and the tenge’s depreciation, Kazakhstan’s government deficit has decreased significantly since 2018. However, given the share of oil revenues (40% of the total), the non-oil deficit amounts to 6% of GDP. Despite the high deficits of past years, public debt has remained low thanks to the use of the sovereign wealth fund (NFRK). A new bank bailout, which is still possible, should not pose any difficulties. There is room for improvement given poor tax collection performances and the many exemptions. Such an improvement would reduce dependence on oil revenues, while increasing capital spending. Additional resources are expected from privatisation and growing use of private partnerships.

The increase in oil revenues also led to a decline in the current account deficit. The trade surplus increased to 16% of GDP (2018), while the income deficit, generated by the large stock of foreign investment in hydrocarbons, reached 13% of GDP. External debt stands at almost 100% of GDP (August 2018). However, 63% of the total is made up of intra-group loans linked to FDI; the state's share is only 7%. The central bank's foreign exchange reserves, meanwhile, are equivalent to eight months of imports, excluding gold, or 12 months of imports and 18% of GDP when gold is counted, and the foreign assets of the NFRK were worth USD 56.5 billion in August 2018, or 34% of GDP.

Uncertain presidential succession

Nursultan Nazarbayev, who has ruled the country since 1989, was re-elected for a fifth term in April 2015 with 98% of votes. Without any real opposition, his party (Nur Otan) comfortably won the March 2016parliamentary elections, taking more than 80% of votes. The 2017 constitutional reforms, increasing the powers of parliament and government, remain at the theoretical stage. The country's political stability continues to be a source of uncertainty: if the President, who is 77 years old, were unable to remain in office, the nomination of his successor presents a risk of conflicts between the different factions in power. Mass protests are rare, especially as security measures have been tightened owing to fears of terrorism and Muslim fundamentalism.